Inventory Overhang Means 6.5M New Households Needed

June 17, 2011

Inventory Overhang Means 6.5M New Households Needed

06/16/2011 By: Carrie Bay

Experts blame the massive inventory of existing homes on the market for hindering the U.S. housing sector’s recovery. The overhang has been inflated by large volumes of foreclosures, and it’s expected to grow with millions more coming down the pipeline.

Brendan Lowney, macroeconomist for the firm Forest Economic Advisors in Massachusetts, says it will take 6.5 million new household formations to absorb the excess inventory.

Lowney has spent more than 16 years interpreting international economic and policy trends and advising North American companies.

He estimates excess home inventories at 2.5 million. He says this oversupply has put downward pressure on home prices, which in turn has caused a variety of undesirable effects, such as pushing more houses underwater. This negative equity causes even more defaults, thereby increasing the oversupply, Lowney explained.

CoreLogic reports that nearly one-quarter of all mortgage borrowers in the U.S. were underwater as of the end of 2010.

The company’s analysts say the “stubbornly high” level of negative equity could have a significant impact on the industry’s shadow inventory – that looming supply of

homes that are winding their way through foreclosure and expected to end up as REO, plus homes that have already been repossessed by banks but not yet been put on the market.

At last count, Lender Processing Services put the number of mortgages that were delinquent or in foreclosure at 6,388,000. Of those, 2,184,000 properties were in the process of foreclosure.

CoreLogic says current shadow inventory has declined slightly over the past year, but will remain elevated for an extended period of time given that there are still over 2 million non-delinquent borrowers not part of the current shadow inventory but in “very deep negative equity,” which for some can serve as a default trigger particularly when other economic factors such as unemployment are added to the mix.

Based on an analysis of Census vacancy data and housing occupation trends, Lowney says it will take an average of 1.3 million new household formations per year, for the next five years, before a significant portion of the excess home inventory can be cleared.

Lowney states his estimate of the housing overhang sheds light on when the housing market will recover.

Looking at household formation data from the Census Bureau, the 10-year average has been 1.3 million per year.

The decade-high was 3.5 million new households formed in 2001, but there was a sharp falloff due to the recession, down to 772,000 in 2008, 398,000 in 2009, and only 357,000 in 2010.

The figures are expected to pick up this year, with some analysts estimating between 750,000 and 1 million new households in 2011.

Lowney’s not projecting a 1.3 million gain in new households for each year over the next five. He foresees a progression, airing on the conservative side with 600,000 in 2011 and steadily increasing to 1.9 million by 2015.